Setting a limit price when buying or selling stocks can be useful to investors. It allows them to set a target price and avoid overspending or underselling, but it also obligates them to comply with the broker’s wishes if the stock exceeds or falls below the limit price.
Buying and selling stocks is a respected form of gambling, many people think. You, the shareholder, never know for sure if that active stock you buy is going to go up or down. You can be reasonably certain of the direction of your share price, based on market indicators or, in some cases, inside knowledge. In fact, a large number of people buy stocks knowing full well what will happen in the short term. However, long-term behaviors are much more difficult to predict.
Many investors have a target level for the price of a stock when they decide to buy or sell. For example, you might go as low as $50 per share, which is all you want to spend on a certain stock. Once you decide you won’t buy if the stock goes over $50, then you’ve set a $50 limit price for that stock. Especially if you have a limited amount of money to spend, setting a price limit is a good idea.
However, the limit price is not just for you. It is, most importantly, for the broker or the person who will buy the shares for you. Once this person knows your limit price, you are obligated to comply with his wishes and not buy if the stock exceeds this price.
This works in the other direction too. You may decide that you do not want to buy a share if the share price falls below a certain level. It is not worth buying some shares when the price falls too low. Such an eventuality could come after some bad news especially for the company.
It’s not just shopping, either. A limit price can also be useful for selling stocks. You, the seller, can set a price above which you do not wish to sell. If you have a hot stock, one that is rising on the news of good returns and earnings, you probably don’t want to sell that stock. You may decide that $80 is your limit price. Once the stock price reaches $80, you hold onto it.
You could also, for whatever reason, set a limit price below which you would also not sell. Some towns on the way down suddenly become attractive to bargain hunters. A stock that usually trades between $20 and $40, but suddenly trades at $6, could be snapped by someone looking to make a quick profit. In that scenario, you can set your limit price to $10.
Smart Asset.
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